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Sunday, September 30, 2007

many would-be home buyers are about to be stripped of a misperception, namely the idea that when the Federal Reserve Board is cutting interest rates mortgage rates will fall as a result.

In a radio interview with Chuck Jaffe, MarketWatch senior columnist, McBride noted that the Fed is combating the economy, but some observers worry that its bigger-than-expected move might be opening the door to inflation, a concern which has pushed mortgage rates up slightly since the Fed's most recent move.

According to BankRate.com, the average 30-year fixed rate mortgage in the country currently carries a rate of 6.4%, which represents a reversal of course. The average mortgage rate had dropped below that level, to roughly 6.25%, in the two weeks leading up to the Fed announcement Sept. 18 that it was cutting the target for the federal funds rate to 4.75% from 5.25%.

McBride noted that the Fed's rate cut is bad news for long-term savers, as rates on certificates of deposit maturing in two or more years have fallen, while short-term rates have remained steady. This erases any risk premium that a saver gets for tying up money for a longer stretch of time.

Monday, September 17, 2007

Just as rising home prices helped fuel the economic expansion of the past six years by making people wealthier, falling home prices could put a big dent in economic growth in the next few years by making them poorer.

At this point, few economists expect the economy to sink into a recession, but almost all of them agree that consumer spending would slow, perhaps significantly, if home prices were to fall.

With the number of excess homes rising amid falling demand, the negatives in the housing market will "continue putting downward pressure on prices," said Seamus Symth, an economist for Goldman Sachs, who says home prices were plunging at a 9% annual rate in the most recent data. Goldman expects home prices to fall 7% this year and another 7% next year.

The path of home prices could be the key to whether the economy grows or stalls."A big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices," San Francisco Federal Reserve Bank President Janet Yellen said in a recent speech. "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant."

Economists are forecasting that home prices will decline more than 5% this year and nearly 4% next year, according to the latest survey by Blue Chip Economic Indicators. Those same economists expect consumer spending to slow from 3.1% last year to 2.8% this year and 2.3% next year.

While a cumulative 8% drop in home prices (after nearly doubling in the previous six years) doesn't sound so ominous, such a decline would be the largest since the Great Depression.

Because most owners are reluctant to sell at a loss unless they are forced to, it's extremely unusual to see nominal home prices fall. In economists' jargon, home prices are "sticky" on the downside, but not on the upside.

By comparison, prices in the stock market adjust quickly to new perceptions about values, as investors take their losses and move on. During market corrections, the volume of shares traded doesn't fall, because the market quickly finds a new equilibrium between supply and demand.The housing market is completely different. Sellers don't quickly adjust their prices to a new market reality. And because prices don't fall to bring demand into balance with supply, the volume of houses sold plunges during a correction. Home sales are now down 23% from the peak more than two years ago. The housing market can take years to find an equilibrium. In most housing corrections, sales remain very weak until excess supply is worked off. Prices can be flat for years.

So why are prices falling now? There's every reason to believe that supply and demand are getting even further out of balance. The number of vacant homes is at a record level, and more new homes are coming on the market every day. Foreclosures are rising, further increasing supply. More adjustable-rate mortgages will reset to a higher monthly payment in coming months, pressuring more homeowners to sell or default.

At the same time, the rationing of credit is reducing demand. The subprime and Alt-A mortgage markets, which represented about 40% of mortgages last year, have almost completely dried up. Lenders are increasing their standards for approving a loan, and interest rates for jumbo loans have risen substantially.

The difficulties in the mortgage market will not only depress home sales, it will also reduce consumer spending. In recent years, consumers have taken advantage of the mortgage market to withdraw and spend some of the equity they've built up in their homes,"We've given people the ability to spend more, and it's going away now," said Paul Kasriel, chief economist for Northern Trust.

Economists can't agree on how much spending has been boosted by mortgage-equity extraction, also known as MEW.

Some theorize that each additional dollar of wealth (from appreciation in assets such as housing or stocks) boosts spending by about 3 cents. By that account, the $8.1 trillion gain in real estate values since 2001 added about $243 billion to consumer spending over those six years, an insignificant amount compared with the $46 trillion they've spent.

But other economists say extra housing wealth is more likely to be spent than extra stock market wealth. Former Fed chairman Alan Greenspan and Fed economist James Kennedy concluded in a study published in 2005 that consumers spent about half of what they took out of their homes, and invested the other half in home improvements.

Friday, September 7, 2007

According to the group's quarterly delinquency survey, a seasonally adjusted 0.65% of loans on one- to four-unit residential properties entered the foreclosure process during the period, the highest level in the survey's 55-year history. In the first quarter, when the previous record was set, 0.58% of loans entered the process; a year ago, 0.43% entered the process.

The delinquency survey covers more than 44 million mortgages, meaning more than 286,000 loans entered the foreclosure process during the quarter. Coverage of home buying and selling, housing prices, mortgage information and home improvement

Driving the numbers were the states of California, Florida, Nevada and Arizona, said Doug Duncan, MBA's chief economist and senior vice president of research and business development, in a news release.

"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty-four states had decreases in their rates of new foreclosure and the increases were very modest in the states with increases, other than those four," Duncan said.

Duncan said there was a "clear divergence" in performance between fixed-rate and adjustable-rate mortgages because of the impact that rate resets have.

"While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed- rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans," he said.

Less clear is whether rate increases in subprime ARMs are causing major problems for those four key states, or whether local market conditions that are causing prices to drop are the main culprit because the lower prices are making it more difficult for people in unaffordable loans to refinance, said Jay Brinkmann, the MBA's vice president of research and economics, in a telephone interview.

California has 17% of the subprime ARMs in the country and more than 19% of the foreclosure starts on subprime ARMs. California, Florida, Nevada and Arizona have more than one-third of the country's subprime ARMs and more than one-third of the foreclosure starts on subprime ARMs.

Home prices have dropped in all four states, and 52 of the 59 metropolitan areas in the four states saw home price declines during the second quarter, according to the Office of Federal Housing Enterprise Oversight, the MBA said. The inventory of new homes for sale in the Western region hit an all-time high at the end of the second quarter, and Florida is dealing with a glut of condo supply, Duncan said.

These are also markets that have experienced a high share of investor loans, Duncan said. The share of non-owner-occupied loans that are 90 days or more past due or in foreclosure, as of June 30, was 32% in Nevada, 25% in Florida, 26% in Arizona and 21% in California. Comparatively, 13% of these loans were in default in the rest of the country.

"Whatever happens in those states is going to drive the national numbers but they don't represent national performance," Brinkmann said.

More statisticsAccording to the survey, 1.40% of all outstanding loans were somewhere in the foreclosure process during the second quarter, up from 1.28% in the first quarter and 0.99% a year ago.Greatly factoring into those figures are markets such as Ohio, where mortgages that are 90 days or more past due or in foreclosure was still more than twice the national average, Duncan said. In addition, 1% of mortgages in Michigan entered the foreclosure process in the second quarter, and nearby states including Indiana, Illinois, Kentucky, Tennessee and Pennsylvania are also seeing foreclosure problems, he added.

"While Michigan's problems continue to escalate, however, Ohio's have shown signs of leveling off, albeit at a high level," Duncan said in the release.

The delinquency rate for mortgages on one- to four-unit proprieties was 5.12% in the second quarter, up from 4.84% in the first quarter and 4.39% a year ago.

Looking aheadThe freeze up and turmoil in the mortgage markets that has occurred since June 30 will have an effect on these numbers in the coming quarters, Duncan said during a conference call with reporters.

Because credit availability has been constrained, refinance options are limited for borrowers, curtailing opportunities for homeowners on the margin of being in trouble, he said.Due in part to the turmoil -- and possibly the affect of resets in 2/28 ARMs that were originated in 2005 and 2006 -- the MBA suspects that the peak in foreclosures and delinquencies hasn't yet been reached and won't until the next two to four quarters, Duncan said.

A research note by Lehman Brothers Economics said that the MBA results are consistent with the view that "the housing recession looks far from over," adding that tighter lending standards and the shrinking availability of credit should cause the performance of mortgage loans to get worse.

"As subprime ARMs continue to reset to higher rates, many borrowers will be forced to default and in some cases ultimately foreclose," the note read. "Higher foreclosures will add to already bloated inventory of homes, extending the housing recession."

Another note from Ian Shepherdson, chief U.S. economist for High Frequency Economics, pointed out the increase in the number of subprime loans compared with 2002, explaining that the number of subprime delinquencies is magnified as a result.

According to the MBA report, the delinquency rate for subprime loans was 14.82% in the second quarter, up from 13.77% in the first quarter. But while in the second quarter of 2002 there were 1.19 million subprime loans outstanding, today there are about 5.9 million, Shepherdson said.

"That's why the problem now is so much worse despite similar headline delinquency rates. Also, note that the rise in delinquencies this time is mostly due to resetting ARMs; the unemployment rate has not moved up. In '02, job losses did all the damage."

"So what happens now if unemployment goes up as resets increase too? Well, you ain't seen nothing yet," he wrote.

The MBA expects the Federal Reserve to cut rates a quarter percentage point in the next two meetings, a response to projections of weaker economic growth and higher unemployment, Duncan said.

He also commented that the rise in delinquencies and foreclosures has been the tradeoff to the steep rise in homeownership, which has come about after a major policy push to create more homeowners. He also pointed out that 35% of people who own a home don't have a mortgage.-Marketwatch